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How can a trust be Shariah-compliant?

How can a trust be Shariah-compliant?

The Anglo-Saxon trust is a unique legal tool whose origin has been the subject of much debate among legal scholars. One of the latest theories is that it was inspired by the Waqf, an Islamic endowment of property held in trust and used for charitable or religious purposes.

Today, although fundamentally Anglo-Saxon in law, trusts can be designed to realise a family's desire to provide for the next generation in a way that respects Islamic principles.

 

For many wealthy Middle Eastern families, it is important that their estate plan complies with Shariah principles

Our latest survey of wealthy families and business leaders in the Middle East showed that when it comes to estate planning, having a plan that complies with Shariah principles is important for two-thirds (67%) of respondents, especially among the older generation (74% vs. 62% of younger respondents). The proportion also increases with wealth. 79% of those with more than USD 10 million in assets say that Shariah principles are important to them, compared to 61% of those with between USD 1 and 3 million.

It is never too early to think about estate planning to protect one’s family from potential conflicts that may arise after passing away. Many have experienced the dual pain of losing a loved one while being bogged down in family conflicts due to unsettled or ill-settled succession. It is this kind of experience that we do not wish to leave to our children.

Taking advantage of the flexibility of the trust while maintaining the ethical guidelines of Islamic principles

In this respect, the use of a trust is an excellent option, providing the flexibility of the tool itself with the rigor and framework of Shariah principles.

For example, a contribution to a trust, properly made during the lifetime of the settlor, may be considered an irrevocable gift akin to the Islamic intervivos1 gift known as ‘hiba’.

The trust allows for a great deal of flexibility - both in the choice of beneficiaries and in the rules and methods of distribution that best protect their interests - while adhering to Shariah rules of inheritance. Importantly, the settlor has the option2 to retain a high degree of control over the investment of the trust's assets, including a power to restrict investments to those that comply with the principles of Islamic finance.

Shariah principles can be embedded in the trust in a bespoke solution specifically tailored to ones’ needs

Shariah principles can be embedded in the trust in a bespoke solution specifically tailored to ones’ needs. From conception to implementation, from management to distribution, it is possible to incorporate Shariah principles at every stage of the trust's life.

A personalised approach is key to a successful estate plan, but depending on the desire for a Shariah-compliant trust and the place of residence of the settlor, the trust may need to be reviewed by an Islamic scholar in the settlor's home jurisdiction to ensure that it fully complies with Shariah principles.

 

Choosing the right jurisdiction and the right trustee to establish a trust

The creation of a trust is not a trivial act, so it is important to choose the right jurisdiction. Anyone placing their assets in a trust needs to be sure that the legislation of the jurisdiction concerned is sufficiently reliable, stable and solid to protect their interests in the long term, while being flexible enough to adapt to their changing needs.

Whether it is to protect one's wealth or to organise one's estate, continuity often plays a key role in the decision to establish a trust. Settlors want to ensure that their wealth will be passed on safely to future generations in the right way and at the right time.

Read also : Preparing for the great Middle East wealth transfer

It is important to choose a jurisdiction that has a regulated trust industry, is politically and economically stable and has a well-established and consistent legal system

It is therefore important to choose a jurisdiction that has a regulated trust industry, is politically and economically stable and has a well-established and consistent legal system. Bermuda, the Bahamas, Jersey and Singapore, for example, meet these criteria while having a developed English common law system with a strong tradition and experience of enforcing trusts.

Similarly, it is extremely important to select the right trustee. For example, trustees should be able to demonstrate financial independence, including sufficient insurance coverage, proper internal checks and balances, and in-depth knowledge of the jurisdiction where the settlor and beneficiaries reside.

Family and generational transitions must be the result of a careful and structured thought process to ensure a smooth transition of wealth from one generation to the next.

At Lombard Odier, which has been present in the Middle East for over 50 years, we seek to be the private bankers of choice for our clients and their families - not just today, but over the long term, generation after generation.


 

1 A ‘hiba’(literally gift) must be made during the settlor’s lifetime.
2 Settlors can also delegate management of the assets under trust to the trustees or professional investment managers.

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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